Recession proof?

Recession-tested: Unlike most local CEOs, James Gidwitz of Continental Materials has steered his company through an economic slump. Photo: John R. Boehm

James G. Gidwitz is a CEO with a dark past. His tenure stretches back to a time when order backlogs shrank a stunning 90% in six weeks.

"I've seen more than one downturn," says the 54-year-old, who has led Continental Materials Corp. for 18 years.

Mr. Gidwitz is a rarity. As an economic slowdown, if not outright recession, threatens to curtail a record, nearly decade-long boom, only about 10% of the 200-plus public company CEOs here have been in their jobs since the last recession, in the early '90s. The economic expansion's unprecedented duration also has outlasted the tenure of many corporate directors.

"We've raised a whole generation of management teams, CEOs and board members who haven't been through any trouble," points out Jay Marshall, a principal at Southfield, Mich.-based turnaround firm Jay Alix & Associates. "They walk off the cliff together without ever realizing there was a cliff there in the first place."

Most CEOs, more accustomed to skilled-labor shortages, booming markets and IPO riches, lack even misty memories of the layoffs, plant closings and balance-sheet dislocations associated with economic contraction. Their careers may have spanned such periods, but their CEO tenures  four to six years on a national average  have not.

Many of the Chicago area's largest companies  Sears, Roebuck and Co., Sara Lee Corp. and UAL Corp. among them  are headed by relative novices untested by recession. Some are already struggling despite the recent boom. They may soon face the added challenge of a harsh economic climate.

With economic indicators falling faster than expected  the National Assn. of Purchasing Management's index of factory activity fell last month to its lowest level since the April 1991 start of the recovery  the Federal Reserve Board signaled its worries last week by cutting interest rates by half a point.

In a recession, happy choices about where to expand abroad or when to launch a new product line give way to wrenching decisions over which factories to shutter and how many workers to cut loose. Financial flexibility disappears as capital markets tighten, and profits shrink as inventories balloon.

Experienced CEOs say the key to handling a recession is recognizing and acting on the first signs of a slowdown. When trouble comes, "the newer CEO will wait too long to react, hoping that it's just a one-month fluke," warns G. Thomas McKane, president and CEO of Franklin Park-based metals firm A. M. Castle & Co. "Waiting too long vs. acting ahead of time is the difference between a new and an experienced CEO."

At 56, Mr. McKane is a little of both. In his post since May, he endured a recession (with the full dose of plant closings and layoffs) as president of St. Louis-based Emerson Electric Co.'s Rigid Tools subsidiary. Like Continental Materials' Mr. Gidwitz, who began trimming employment in September and November, Mr. McKane is heeding familiar warning signs.

Warren Batts, a recession-tempered CEO who is now an adjunct professor of strategic management at the University of Chicago's Graduate School of Business, says CEOs, lulled by years of easy credit and surging demand, simply don't pick up the warning signs of a deteriorating environment.

"The most trouble I've seen us have was when we lost sight of our customers' customers," says the former CEO of Premark International Inc., the Tupperware maker created in 1986 by the split-up of Dart & Kraft Inc. "All of a sudden, the inventory started backing up much faster than we expected. Monitoring what was happening way downstream was the key to staying alive."

A. M. Castle's Mr. McKane has ordered managers to assume zero revenue growth in 2001 (compared with a 4.5% increase last year) and refrain from additional spending "until the sales level is pretty assured. . . . In addition, we've taken a number of steps to improve cash flow  reducing excess inventories, tightening up receivables and fixing, closing or selling underperforming assets."

To heighten managerial flexibility, he recommends outsourcing more needs. A. M. Castle is scrutinizing four business units (which Mr. McKane won't identify) to shape up or dump, and it won't undertake new ventures without a promised payback period of 24 months or less.

At the same time, Mr. Gidwitz says, it's as important to prepare for the next upturn as for the looming downturn: "Try to shrink into a crouch, so you can stand up and run again." That means not skimping on research and development spending, always an easy  but mistaken  target for recession-driven expense reductions.

Develop new products during a recession, concurs Mr. Batts, but wait to introduce them until after, as Premark's Wilson Arts unit used to do with its lines of decorative laminates.

Agrees Walter Scott, a professor of management at Northwestern University's Kellogg Graduate School of Management who was CEO at IDS Financial Services in Minneapolis before its sale to American Express Co.: "The really effective CEOs are managing both sides of the equation  tightening the expense side and pursuing growth."

Mr. Gidwitz is practicing what the professors preach. Having imposed Continental Materials' "profit-assurance" plan, aimed at curtailing overhead expenditures from the top down, the Chicago-based construction industry supplier last week also announced the acquisition of a Colorado-based concrete producer.

Targeting opportunity

"We've identified all our operating areas where we want to push for growth in revenue, regardless of where the economy grows," he says.

With financing doors slamming shut for many less well-positioned firms, Mr. Gidwitz had little trouble borrowing to finance the deal, in part because he had previously cut corporate debt to zero in anticipation of leaner times and tighter financing sources.